We need a political strategy to empower state enterprises, reduce tax payer burden: Eran

Oct 30, 2015 (LBO) – Sri Lanka needs to have a political strategy to support the implementation of reforms and restructurings of state owned enterprises to reduce the burden on the treasury or the tax payer, deputy minister of state owned enterprises (SOEs) said.

“We have a situation in which the tax payer at large is paying for the expenses of a few who actually benefit directly from those enterprises,”Eran Wickramaratne, deputy minister of state enterprise development told a forum organized by the Institute of Policy Studies.

“So the burden of the state enterprises on the treasury or on the tax payer essentially needs to be brought down,” he said.

“Taking some lessons from the past, I think our reforms and restructuring have to be preceded by a political strategy, so that the stake holders widely understand what we are trying to do and the stake holders understand that this is going to give them a return and it is in their interest.”

“And therefore I would say that the political strategy is even more important than the reform and restructuring that we have to do.”

He says the new administration plans to manage performance of state workers while reducing political intervention and interference in the state owned enterprises, “so that the managers of these institutions could pursue their economic and financial goals.”

State enterprises are defined as legal entities that undertake commercial activities on behalf of an owner government.

State enterprises which pay salaries to employees through tax payers’ money have incurred losses over the past decade and have been criticized for being bloated services.

Official data shows that state group returns on assets trails far behind their privately owned counterparts.

Experts add that there has been no progress in halting losses incurred by the SOEs. Since 2005, there has been a clear policy reversal with further privatization efforts ruled out in favor of ‘restructuring’ SOEs. But SOEs continue to make huge losses. Especially the larger corporation such as the Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC) and Sri Lankan Airlines.

Operating losses of selected SOEs

Rs.Billion

2012

2013

2014

CEB

-62.1

24.6

-11.7

CPC

-89.6

-7.9

1.7

SriLankan Airline

-27.0

-28.6

-29.0

CEB enjoyed an operating profit in 2013 due to greater utilization of hydropower and a tariff revision, but this has been the exception.

Wickramaratne says there are twin problems the new administration face when reforming the state owned enterprises – the issue of ownership and the issue of management.

“I think without being dogmatic about any of these issues, we should be taking a more pragmatic approach,” Wickramaratne says.

But privatization is not the only solution for ownership issue, he added.

“I would like to pass the issue of ownership by saying that where there is capital required we will pursue different means of attracting the capital that is actually required,”

“And the reason I passed the question of ownership is that often people use the word of privatization and I have been haunted by the press to know where the government is on privatization or not and I have deliberately left that word out because of the connotation that word has been assigned over a period of time,”

“So for me it is not a question of one side fix all and there is one solution for all the problems of state owned enterprises and given the range of enterprises, the differences in the particular industries, we will look at each industry separately and institutions separately with an open mind,”

“So it is capital that actually needed in some of those.”

Sri Lanka’s fiscal management responsibility act of 2003 capped direct borrowing by state entities with treasury guarantees to 4.5 percent of GDP. This was subsequently amended in the budget 2013 and raised to 7 percent. This move encouraged the SOE’s to get direct borrowings with government guarantees ensuring better terms and conditions.

However this has resulted in the contingent liabilities increasing sharply from 1.6 percent of GDP in 2006 to 5.7 percent of GDP in 2014, heightening systemic risks for overall fiscal stability.

Wickramaratne argues the other issue the state owned enterprises face is productivity.

He says the SOEs are lacking right managerial skills to improve productivity.

“Personally in my corporate experience, I strongly believe, the secret in any enterprise is ultimately its people even more than its capital and technology.”

“Productivity is the biggest issue facing state owned enterprises.”

“Whether we measure this productivity as productivity per capital employee or per labor, productivity has to improve and therefore clearly there has to be management independence in improving productivity where there are deficit in terms of management skills,” he said.

“We should find a way of bridging that gap in management.”

“I think we will have to look at innovative structures in actually bringing people.”

“Unless we are able to fundamentally address that question in terms of management and skills we are never be going to able to turn around these industries.”

Sri Lanka’s public servants have often been blamed for their slow and zero time management services who takes half of the island’s tax revenue to maintain. But they are the key player in bringing or changing the administration of the Indian Ocean island.

The new administration also raised the salaries of state sector employees by 10,000 rupees through interim budget proposal and 5,000 rupees out of that was given in February on top a 3,300 increment given by the last regime. The remaining 5,000 rupees was added in June this year raising state sector employees’ salaries by 47 percent.

“If you look at it over a period of time, we have under invested in our public services,” Wickramaratne said.

“We get the best brains from the universities in the country and somehow or the other we do not get the corresponding output of employing that capital of a period of time.”

“But if you look at the private sector we can draw a lesson from them which is heavily invest. Ongoing training is the key, because learning is now a lifelong skill. It is an investment; so we need the best management and that would need to look at remuneration, innovative structures and investments as policy measures.”

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